STRATEGIES

Whether in competitive sports or piano playing, it pays to practice, practice, practice, which is also true in the art of stop placement. Here, MoneyShow.com’s Tom Aspray, reviews a few recent trades to help improve your stop management skills.

In the last trading lesson, Mastering the Basics of Stop Placement, I shared some examples of how I place initial stops and how they are adjusted as the trade progresses. Using past recommendations as examples I hoped that the reader would gain some insight so that they could improve their stop management as well as learn how to better protect their profits

From the response it appears that I was successful and the process also allowed me the opportunity to dissect many of my trades, which is always a good learning experience. Through additional examples I would also like to offer some suggestions on what might have been done differently.  

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This has been a good year for the healthcare stocks as the Select Sector SPDR Health Care (XLV) is up 15% so far this year while some of its industry groups like biotechnology have done much better. It was one of the industry groups that I focused on in May as I recommended going 50% long Amgen Inc. (AMGN) at $68.54 and 50% long at $67.12 with a stop at $64.76 (risk of approx. 4.5%).

AMGN had broken out of a four-month trading range in April and was consolidating in May. The initial stop, line a, was placed well under the April lows. In early June, AMGN had a low of $67.21 and hit the first buy level. Two weeks later it overcame the resistance at line b and completed its continuation pattern. The stop was then raised (point 1) to $66.89, which reduced the risk on the position.

AMGN made a high in late June of $73.75 and after a brief pullback turned higher again. This created a short-term swing low and on June 29 (point 2) I raised the stop to $69.34, which was well under the low at $70.88.

After a brief correction from the new high on July 3 at $75.17, AMGN again moved higher, so on July 9 (point 3) I recommended selling ½ at the position at $76.88 and tightened the stop to $73.46. This was just under the low of $73.61 on July 5 and in hindsight was probably too tight as under $72 would have been better. I was fortunate to avoid being stopped out.

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The sell order was filled six days later (point 4) and AMGN hit a high a few days later at $80.25. Just three days later AMGN was back to $75.70, but soon after rallied sharply to another new high of $84.39. Therefore on August 9 (point 6), I raised the stop to $74.68 as I did not want to see a drop below the prior low of $75.70.

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Tickers Mentioned: Tickers: XLV, AMGN, PFE, AAPL, M